The Troika’s Rise – and Fall? A Closer Look at the IMF’s Role in the Euro Crisis

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While long a tenured expert with over 60 years of experience in all things financial crisis, the International Monetary Fund (IMF) was put to the test when it first joined forces with the European Commission and European Central Bank in 2010 to tackle the European Financial Crisis.

Upon the establishment of this ”Troika”, questions arose whether the collaboration should be seen as a sign of European weakness, or whether it was a tactical move by the EU countries to gain the valuable expertise of the IMF in resolving the crisis.

With its continued role in the Euro Crisis expanding and solidifying, further questions are arising in regards to the Troika’s longevity and the effects the coalition is having on the integrity of both the IMF and European institutions.

Born of our Circumstance

In March 2010, the then-President of the European Central Bank (ECB), Jean-Claude Trichet, denied the possibility of an IMF role in the European financial crisis. He proclaimed that Eurozone countries were in no need of additional external financial stabilization, and alleged that European states facing an economic downturn had sufficient help of other European countries to get themselves back on track.

Less than a month later, rating agencies cut Greek’s rating to junk status, and the crisis deepened. As the Greek bond rate spreads widened dramatically, other EU countries, including Portugal, Ireland, Spain and Italy, also watched as their fiscal deficits and sovereign debt refinancing costs rose substantially. Stability was slipping out of the system.

European institutions had little success in stopping the deterioration of the market. The ”European Solution” had little effect as the policy prescriptions outlined in the EU Treaty were either insufficient or not followed, and the EU Commission itself had no credibility or experience in handling severe national fiscal problems.

In mid-April, 2010, the IMF joined the EU to announce a new coordinated financial support and economic adjustment program for Greece. The involvement of the IMF seemed indispensable – and this to an elevated extent because German Chancellor Angela Merkel made the Fund’s participation a precondition to Germany’s financial assistance to Greece. Thus, the Troika was formed.

While its economic monitoring and money lending expertise contributed largely to the decision to bring the Fund on board, there were other political reasons driving the cooperation further. While already in Europe’s interest to keep Greece in the Eurozone (as stressed with Merkel’s famous ”Europe will fail if the Euro fails”), the United States further supported Greek survival, since the Mediterranean country is a NATO member and important geopolitical region hosting US Military bases. As, together, the U.S. and Europe have an IMF-voting power of close to 50%, their joint interest in protecting Greece largely facilitated the EU-IMF cooperation.

Despite being born under the best intentions, the Troika’s virgin collaboration effort has not always translated into the most coherent policy agenda. Formed merely on an ad-hoc basis under reasons making their cooperation almost inevitable, it stands to wonder whether this cooperation is actually having the intended benefit, and whether it serves a lasting purpose.

Reaping from IMF status

One of the main issues of the ”European Solution” to the economic crisis was the failure of European institutions to obligate EU member countries to reduce their budget deficits and comply with the rules of the European Stability and Growth Pact. The institutions have lost their reputation, and their advice is disregarded largely because of the partial political influence they hold.

As an external actor, the IMF can stronger resist regional political influences and is therefore better able to credibly install and enforce tougher programs. For this same reason, the participation of the IMF along with the European institutions facilitated the adherence to terms and conditions for programs.

While internal crediting among EU countries can be contingent on interstate relations, the IMF enjoys a preferred creditor status wherein their loans have to be repaid before those of any other creditor, ensuring a commitment from program countries to be responsive to proposed IMF reforms.

The presence of the Fund has also served to mitigate the moral hazard problem often subsequenting internal credit lending; as struggling countries know that it is in the EU’s best interested to keep them in the Eurozone, they can pressure the EU institutions handling their bailouts to be less severe. As a powerful external creditor, the IMF’s strong credible conditionality forces countries to play by the rules and adhere strictly to the terms set out in the loan agreement .

Because the risks for provided IMF loans are shared by all IMF member countries instead of just EU member states, the insurance mechanism set up by the IMF is more stable than that of the EU funds alone. With its role as an independent external creditor, the IMF furthermore supports the interest of not just a single country, but that of the broader global community.

While the IMF and EU institutions have started to work together more closely in order to achieve these benefits, the increasing integration of the IMF with the European Commission (EC) and European Central Bank (ECB) may actually be putting these positive effects in jeopardy as their ties tighten.

A Match Not Made in Heaven

Closer ties between the Troika constituents could lead to problems for both the IMF and EU institutions, as well as the success of their proposed programs. Highlighted by the quick approval of IMF coordination and fact that the head of the IMF has always been a European, critics have pointed out that the coordination efforts between the IMF and European institutions has served simply to further the interests of the better-off countries driving European reform, such as France and Germany.

The closer ties established through the Troika are seen as softening IMF programs and tailoring them more readily to European interests rather than falling in line with the IMF’s own steadfast regulations. This is best demonstrated by looking at the immense amount of funds the institution has already allocated to Greece – an amount totaling nearly half of the IMF’s lending power.

If adequate funds cannot be raised in the EU countries, funding for Asian and African countries – where IMF funding is arguably most necessary – may not be sufficient.

Together Forever?

With the IMF looking more and more like a lender of last resort, questions of whether the deposits at the IMF are still safe are mounting. With the Fund already expending its support to Greece, Portugal and Ireland, there is little doubt that it does not hold the capabilities to extend this support to Italy and Spain – countries also struggling severely.

If proven successful in its economic adjustment programs, the Troika could be a model for the future. While collaboration is warranted in order for the joint programs to work, a blurry and unbalanced integration could also cause harm to all parties at stake. If the IMF continues to maintain its credible role as a monitoring and enforcing agent, however, its involvement in the Troika is likely to facilitate a more stable restoration of long-term economic success and stability.